Fitch Publishes Intrepid Aviation's 'BB-' Rating; Outlook Stable

17 January 2018

Fitch Ratings-New York-17 January 2018: Fitch Ratings has published Intrepid Aviation Group Holdings, LLC's (Intrepid) long-term Issuer Default Rating (IDR) of 'BB-' and senior unsecured notes rating of 'B+'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.

Rating constraints include Intrepid's elevated balance sheet leverage; secured funding profile; relatively short track record; limited profitability due to sub-scale size; smaller and less liquid fleet when compared with other aircraft lessors focused on more broadly utilized/traded narrowbody aircraft; and private equity ownership, which introduces the potential risk of more equity-oriented actions, particularly if the related funds are approaching the end of their stated fund lives.

Rating constraints applicable to the aircraft leasing industry more broadly include the monoline nature of the business; vulnerability to exogenous shocks, potential exposure to residual value risk; sensitivity to oil prices; reliance on wholesale funding sources; and increased competition.

As Dec. 31, 2017, Intrepid's owned and ordered fleet consisted of 30 Boeing and Airbus aircraft that are predominantly widebodies. The weighted average age of the portfolio was 3.4 years, which compares favorably to other aircraft lessors, and the portfolio is well diversified geographically. Nevertheless, the portfolio is somewhat concentrated by airline, as it had only 13 customers as of Sept. 30, 2017. Top lessees were Philippine Airlines (18.5% of annualized revenue), Turkish Airlines (14.8%), AirBridgeCargo Airlines (8.5%), Air France (8.3%), Air Namibia (7.5%) and Sichuan Airlines (7.5%).

Intrepid has an improving track record of obtaining debt financing from the commercial bank market, the capital markets, government-sponsored export credit agencies, and equity contributions from its sponsors, including Reservoir Capital Group, L.L.C. and Centerbridge Partners, L.P. Notable transactions in 2017 included the issuance of $277.8 million of institutional secured term loans backed by the Aircraft Finance Insurance Consortium (AFIC) and $47.3 million of capital contributions via the issuance of preferred equity interests to its sponsors.

Intrepid established access to the unsecured bond market in 2014-2015, issuing an aggregate of $635 million of notes. At Sept. 30, 2017, unsecured debt represented 18.9% of total debt funding, which was within Fitch's 'bb' quantitative benchmark range for balance sheet-intensive finance and leasing companies. Still, the company has no unencumbered assets, which limits its financial and operational flexibility.

A significant credit strength for Intrepid is its long-dated contracted lease stream. Total contracted revenue as of Sept. 30, 2017 pro forma for transactions that occurred in fourth quarter 2017 was approximately $2.4 billion, which represented approximately 90.3% of total debt, and provides a solid source of debt repayment absent lessee credit events. Cash on hand and cash flow from operations over the next 12 months should adequately address next 12 months debt maturities. Fitch expects that Intrepid will continue to primarily fund its business with secured credit facilities.

Intrepid's leverage, measured as debt to tangible equity, was 4.2x as of Sept. 30, 2017, down from 4.7x at year-end 2016 and 4.8x at year-end 2015. Fitch believes the company's private ownership is the main driver of the elevated balance sheet leverage, as compared to peers, and leverage is at the high end of Fitch's 'bbb' quantitative benchmark range for balance sheet-intensive finance and leasing companies.

The 'BB-' senior secured debt ratings are equalized with Intrepid's IDR given the heavily secured funding profile. The 'B+' senior unsecured debt rating is one notch below Intrepid's IDR given the subordination of these obligations and the lack of an unencumbered asset pool.

The 'BB-' IDR for Intrepid Finance Co., a wholly owned subsidiary of Intrepid, is aligned with Intrepid's IDR since Intrepid Finance Co. is a co-issuer of the company's corporate debt.

The Stable Outlook reflects stabilization in the widebody aircraft market, as declines in market values and lease rates have moderated and Intrepid has recently sold widebodies at gains. Additionally, Fitch's concerns about the credit profiles of certain Intrepid lessees have also diminished, as Alitalia (5.5% of annualized rental revenue) remains current on all payments, despite bankruptcy proceedings, and Intrepid's portfolio remains 100% utilized with a weighted average remaining lease term of 8.3 years. The Stable Outlook also takes into account the company's solid access to capital and adequate liquidity position.

RATING SENSITIVITIES - IDRs and Senior Debt

Intrepid's ratings could be positively influenced by enhanced scale and lessee diversification provided such actions are undertaken at a moderate pace and do not adversely affect underwriting or pricing terms. Reduced leverage, sustained improvements in profitability, and continued demonstration of fleet management would also be viewed favorably.

Intrepid's ratings could be negatively affected by credit deterioration of underlying lessees, particularly those which represent a meaningful portion of Intrepid's portfolio; a significant increase in leverage levels; rapid expansion that is not accompanied by consistent underwriting standards and commensurate growth in capital levels and staffing; outsized impairment charges or an inability to successfully navigate market downturns.

The ratings of the senior secured debt are primarily sensitive to changes in Intrepid's IDRs and secondarily to the relative recovery prospects of the instruments.

A meaningful increase in the proportion of unsecured funding and creation of an unencumbered asset pool could result in an upgrade of the unsecured debt rating.